Blessed by the Potato

Perspicacity is one of my favourite words. The dictionary definition mentions understanding and discernment, and I think of it as more specifically referring to the ability to discern what is and is not important from conflicting data. Part of what helped rocket it to near the top of my favourite word list is that it was the defining trait for NASA astronaut selection during the space race:

The quality most needed by a scientist serving as an astronaut might be summed up by the single word ‘perspicacity.’ The task requires an exceptionally astute and imaginative observer but also one whose observations are accurate and impartial. He must, from among the thousands of items he might observe, quickly pick out those that are significant, spot the anomalies and investigate them. He must discriminate fine detail and subtle differences in unfamiliar situations, synthesize observations to gain insight into a general pattern, and select and devise key observations to test working hypotheses.

There have been many articles on the state of the housing market — more every day — but for today I will pick on Larry MacDonald. In part because his dig (or his headline editor’s) at bears for making “unsubstantiated claims” was highly unfair: housing bears are some of the most data-driven people I know. (Though speaking of editors, he may have just drawn the short straw in taking sides for a manufactured debate). And in part because his articles (like many bullish ones) seem to lack perspicacity.

We had the one where he tried to set up an esoteric monetary policy criteria as being necessary for a housing correction, though left unsaid was the market’s vulnerability should such an inversion in the yield curve arise, or how changes to mortgage insurance might have the same effect. The affordability index is a perennial favourite, though it is highly interest-rate dependent. In short, lots of focus and analysis on the measures and factors that are — IMHO — not as fundamental.

The most egregious is also the most recent: “Is Canada talking itself into a housing crisis?” He tries to take a paper by Shiller — Professor Robert “Irrational Exuberance” Shiller! — to make the case for there not being a bubble in Canada, and that all the negative media stories may cause a downturn when the fundamentals are ushering in a soft landing.

In that piece, he picks bits out of the stories to come to strangely opposite conclusions. You can find the Shiller paper online, explaining that buyer expectations help set house prices — and that the media may have helped change those expectations as the market turned in the US around 2006. But that’s negative press precipitating a downturn in an over-valued market that’s primed for it, quite a different matter from Canada “talking itself into a housing crash.” Indeed, in that same article Larry cites a CBC interview with Shiller from September, summarizing Dr. Shiller’s points as “Canada should be spared.” Yet for many others, Dr. Shiller’s take-home message from that interview was “I worry that what is happening in Canada is kind of a slow-motion version of what happened in the U.S.”. He’s not at all saying that housing prices won’t correct or somehow be spared — the suggestion is that such a process won’t take the banks and the rest of the world economy down with it.

Dr. Shiller argued — in advance — that the fundamentals were out of line and that a correction was due in the US. He has not been as vociferous about Canada, but has several times said that Canada in general, and Vancouver in particular, are worrisome. Hell, even when trying to be bullish the bit about the RBC affordability index can’t support the insane singularity that is Vancouver. The paper Larry cites is about perception and media reports affecting the timing of the correction, not causing it. If anything, it’s just as much about how expectations helped fuel the bubble in the first place.

The real world is a messy place, and markets particularly so, with a great deal of data to parse, much of it conflicting. Hell, differing perspectives and valuation schemes are what make a market. So one must proceed with a degree of perspicacity: seeing what is significant, understanding what conflicting data imply, and acting with all due caution.